Are Shorter Supply Chains the Solution to COVID-19 Business Interruption?

COVID-19 exposed some of the flaws in the traditional supply chain model and left businesses scrambling to fill the gaps. It exposed the downsides of over-reliance on international suppliers: According to a Deloitte study, the disruption that beset Chinese manufacturing had a particularly severe downstream effect, especially for the more than 200 of the Fortune Global 500 firms that had a presence in Wuhan. Additionally, volumes at ports and airports plunged so much that, according to a May 2020 brief by the International Transport Forum, global freight transport could drop by up to 36% by the end of the year.

Given these pressures, it has been nearly impossible to maintain a seamless flow of goods across international borders. As reopening continues and demand for products like hand sanitizer, liquid soap, protective equipment, pharmaceuticals and even staple foods such as flour soars, it’s imperative for businesses to critically re-evaluate their supply chains to hedge against any future disruption that might cause pockets of manufacturers to temporarily go offline.

How the supply chain evolved over time

Businesses are always looking for new ways to optimize and improve their supply chains but figuring out the right approach requires an understanding of the macrotrends that shape trade and manufacturing. 

A few decades ago, manufacturers began adopting the ‘just-in-time’ supply chain model, a process that relied on optimized logistics to cut back on overhead costs. In the just-in-time model, materials enter the production chain exactly when they’re ready to be processed, reducing the need to store bulk-purchased raw material in warehouses. The approach optimized efficiency but left an unwelcome side-effect of leaving supply chains vulnerable to global shocks — if interruption occurred, manufacturers had no material stockpile available to tap.

As noted by some experts, including KPMG, a global network of firms that provide audit, tax and advisory services, changes to the political climate over the past few years have encouraged some companies to migrate away from the global-first view that came with the just-in-time model. As part of this change, experts predict a return to the ‘make-where-you-sell-and-buy-where-you-make’ approach. It’s one way to do business that’s gathered momentum due to Brexit and the U.S.-China trade disagreement and may likely continue as higher tariffs and export controls create barriers to cross-border trade. Additionally, the way companies think about value is changing. Lowest possible cost may no longer be the sole variable for some —instead, they may consider giving more equal weight to risk exposure, supply alternatives and tax, KPMG predicts.

An increase in ‘reshoring’ could be the net result. Many of the U.S.’s largest companies have been starting to bring manufacturing and jobs back onshore from Asia in recent years. Companies that have onshore facilities may have lower transport costs, while sourcing materials locally means they may be able to respond quickly to changes in demand, cut lead times and reduce the risk of business interruption. The trade-off could be higher labor costs and a smaller pool of skilled workers to choose form. They may have to raise the prices of goods and services, or, if they can’t pass those extra costs onto customers at the expense of profitability.

Do a proper risk assessment of all your supplier relationships.

There is also a sustainability argument for shorter supply chains. Fewer air miles, lower carbon emissions and higher wages for people in the supply chain will all work in companies’ favor as consumers may be paying more attention to the products they buy and how the makers do business.

Companies that have profit margins and strong pricing power will be better able to cope with shorter supply chains than those operating on thin margins. Technological innovation, automation and robotics can all help offset the higher potential costs of onshoring or nearshoring, but that won't be the answer for every business. 

What can you do to improve your supply chain?

Although the exact solution to supply chain disruption is still being debated there are a few things your business can do to help improve and future-proof your supply chain. Consider:

• Using AI and big data to make your supply chain more robust and resilient.
• Perfecting the ‘make versus buy’ mix.
• Rethinking inventory models—asset heavy or asset light?
• Improving automation to speed up production.
• Focusing on visibility. Can you trace your supply chain beyond your tier one suppliers?
• Reliability over cost: consider a larger inventory buffer as a shock absorber.
• Conducting a proper risk assessment of all your supplier relationships.
• Ensuring you have a contingency plan for geographical, economic and political risk.
• Reducing the number of intermediaries in your chain, or at least reduce your dependence on them.

Photo: Getty Images